Monetary policy is a term used to refer to the actions of central banks to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth. Central banks influence the amount of money and credit in an economy, which impact on interest rates and economic activity.
The Bank of Mauritius is mandated to conduct monetary policy and manage the exchange rate of the rupee, taking into account the orderly and balanced economic development of Mauritius.
On 18 December 2006, the Bank introduced a new framework for the conduct of monetary policy. The Key Repo Rate (KRR) replaced the Lombard Rate as the policy interest rate to signal changes in the monetary policy stance. In the new framework, the Bank supplies and absorbs liquidity to hold the overnight interbank interest rate within an interest rate corridor around the Key Repo Rate. The Key Repo Rate, which was set at 8.50 per cent on 18 December 2006, currently stands at 4.00 per cent.
Changes in the policy rate affect economic activity and inflation through several channels. Lending and deposit rates of banks are adjusted more or less in line with changes in the KRR. These changes, in turn, affect the spending, saving and investment behaviour of individuals and firms in the economy. Changes in policy rates also affect expectations about the future course of the economy as well as asset prices and the exchange rate of the rupee. Exchange rate movements affect the domestic prices of imported goods, thus impacting on overall inflation.